27 Jul Financial journalists, know thy history. The credit chasm that caused the Crisis is being crossed.

Credit to Pascal Bouvier for highlighting this piece by Annamaria Andriotis, published 7/26/16 in the WSJ, on the re-emergence of near prime. To paraphrase her gist: Subprime consumer lending has re-emerged, with a new name to conceal the risk.

But her gist doesn’t jibe with the facts. Near prime,Alt-A are well established consumer ABS terms of art. Near prime dates back to the early 1990s, maybe earlier. Alt-A lending did not gain traction until the mid- or late-1990s. Also, near prime describes a benchmark of loan pool performance, not a borrower. Its defining characteristic is a static pool loss rate of 5% or so.

I think a more significant interpretation is that securitization is coming back, though maybe not in quite the same form.

As we know, FASB ASU 2016-13, aka Current Expected Credit Loss (CECL) modeling, requires accounting losses to be reported cumulatively. This is how securitization experts have always measured credit risk. That lenders are now classifying their borrowers thus shows their thinking has crossed the credit chasm, from corporate to securitization.

Whether or not we like the idea of originate-to-distribute, the bundling of loan assets for retention or sale is a facet of modern wholesale debt capital markets. If we do it for the purpose of cheating with numbers (as rating agencies allowed some to do in the CDO market) of course we will regret the results. But with proper oversight, published cumulative measures will give us a sharper tool for risk classification. Less wasted capital means more to nourish the real economy. The best way to begin to finance the real economy is to finance the real economy, i.e., near-prime, based on the risk.

Any economy that can self-finance at ZIRP is isolated from real world risk.

The real worry is not the 5% versus 1.5-2%, but whether the risk has been parameterized. A near-prime pool could also be a blend of prime and subprime. Say the sweet spot for prime is 1.25% and the starting point for subprime is 8%, then a near prime pool could be a blend of the two cohorts in proportions 45% and 55%. But, this is a different financial proposition.